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A Step Forward in the Prevention of Base Erosion and Profit Shifting (BEPS)

22 August 2017

Bulgaria has signed under the conditions of subsequent ratification the Multilateral Convention for the Implementation of Measures Related to Tax Treaties whose primary objective is to serve as a tool for accelerate introduction of anti-tax avoidance measures and base erosion and profit shifting (BEPS). Тhe Convention shall enter into force on the first day of the month  following the expiration of a period of  three calendar months beginning on the date of its ratification. The document proposes concrete solutions to overcome the gaps in the existing international tax rules that allow corporate profits to “disappear“ or be artificially shifted to low or no tax jurisdictions. The implementation of the BEPS project will be reflected on a global scale as it will cover more than 1,100 tax treaties.
 
The Convention generally implements the final BEPS recommendations with limited modification. Four BEPS actions propose changes to tax treaties, namely Action 2 (Hybrid Mismatches), Action 6 (Treaty Abuse), Action 7 (Avoidance of Permanent Establishments) and Action 14 (Improving Dispute Resolution).
 
In respect to Bulgaria, the Convention will apply to a total of 66 Treaties for avoidance of double taxation with the exception of those with the Netherlands, Finland and Malta. With respect to the latter, negotiation of changes or initiation of a bilateral negotiation procedure is expected in the context of the measures set out in the Multilateral Convention.
 
It should be noted that the Conventions is signed with multiple reservations by Bulgaria (Bulgaria will not apply the provisions addressing hybrid mismatches, the avoidance of permanent establishment status, the elimination of double-taxation and mandatory binding arbitration). Bulgaria accepts only Art. 6 and 7 of the Convention which constitute the minimum standard of Action 6 of the OECD Action Plan (i.e. the standards designed to counter treaty abuse and to improve dispute resolution).
 
The minimum standard consists of the following two requirements:
  1. Statement in treaties that the common intention of the parties is to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty shopping arrangements);
  2. Implementation through one of three options: 

A General Principal Purpose Test (PPT) alone;

PPT + Simplified or Detailed rule for Limitation of Benefits (LOB); 

 A detailed rule for Limitation of Benefits (LOB) + a mechanism to deal with conduit arrangements not already dealt with.
 
Bulgaria fulfills the requirement under Art. 6 by including the text under Art. 6, Para 11 in the preamble of 41 treaties (excluding those with Germany, Poland and Romania). 
 
The second requirement for choice of options to counter treaty abuse2 is covered by choosing PPT plus simplified LOB option. Еffect of the general PPT is to deny a benefit under the treaties that would otherwise be granted in respect of an item of income or capital. Simplified LOB limits treaty benefits to qualified persons, items of income that satisfy an active business test or a derivative benefits test and persons or items of income subject to discretionary relief.  
 
Bulgaria also accepts the provision of Art. 16 of the Convention regarding the Mutual Agreement Procedure, as it is also part of the minimum standard, but opts out of the option for including of mandatory binding arbitration in its relations with the other parties to the treaties.
 
The issue of treating a person as a resident, the tax exemption, tax credit and income tax of subsidiaries will continue to be regulated by the bilateral tax treaties concluded so far.
 
In the light of the above, it should also be borne in mind that the Council Directive amending Directive (EU) 2016/1164 as regards hybrid mismatches with third countries (“ATAD II”) was formally adopted by the EU Council. The EU Member States will need to transpose the provisions of ATAD II by 31 December 2019 into their national laws and apply them from 1 January 2020.
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1Statement in the Agreements that the joint intention of the parties is to eliminate double taxation, without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty shopping arrangements in certain jurisdictions)
 
The opportunity to choose between different options for countering treaty abuse has been provided:
 Principle Purpose Test (PPT); 
 PPT + Simplified or Detailed rule for Limitation of Benefits (LOB); 
 Detailed rule for limitation of benefits + a mechanism to deal with conduit arrangements that are not dealt with in the agreements on avoidance of double taxation.
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